The Effects of a RMB Devaluation on ASEAN Economies: An Applied General
Equilibrium Approach

By Robert R. Teh Jr.
Director Trade, Industry and Services

Introduction
There is growing complexity in the economic relationship between ASEAN and China. On the one hand,
China is a major competitor to ASEAN both as an investment destination and as a major producer of
labour-intensive manufactures. But on the other hand, China’s maintenance of the renminbi during the
height of the Asian crisis was a major reason why the crisis did not precipitate an even more devastating
meltdown in the region.
This paper examines the effect of a depreciation of the Chinese renminbi on the ASEAN economies,
focusing in particular, on the resulting pattern of competitive advantage and effect on the market share of
ASEAN economies in major export markets - US, the EU and Japan. To the extent that a devaluation of
the renminbi serves as a proxy for the trade rivalry between ASEAN and China, the outcome of the
simulation should provide some answers to the state of the economic relationship between them.
Ever since the Asian crisis broke out in mid-1997, China's maintenance of the value of the renminbi has
served as a regional anchor preventing what could possibly have been successive rounds of competitive
devaluations. There was, however, an implicit trade-off being made by China - geo-political gain from
maintaining the renminbi as against the loss of export markets, as much cheaper goods from the
crisis-plagued region compete with Chinese goods. However, now as export performance stalls and as
growth slows in China’s domestic economy, the cost of delaying the devaluation may be steadily rising.
The threat of regional currency instability may have also ebbed with the beginning of economic recovery
in the crisis countries, making it less likely that a renminbi devaluation would be followed by
beggar-thy-neighbour responses elsewhere in the region.
To provide a quantitative analysis of the likely impact of such a devaluation on the ASEAN economies,
this paper uses the Global Trade Analysis Project (GTAP) model to simulate several devaluation
scenarios. The first part of this paper describes the GTAP model and examines some of the difficulties
involved in using applied general equilibrium models to simulate macroeconomic crises and devaluation
scenarios. The second part of the paper describes the procedures employed to simulate the Asian crisis

climate change. Hence it is already familiar to a large number of international trade economists and
applied general equilibrium modellers and provides a widely shared platform for investigating
international trade issues.

Regional Household

In each region, there is a regional household whose Cobb-Douglas preferences are defined over
composite private expenditures, composite public sector expenditures and savings. The regional
household derives income from ownership and sales of primary factors of production - capital, skilled and
unskilled labour, land and natural resources. It turns out that the intertemporal, extended linear
expenditure system could be derived from an equivalent, static maximisation problem, in which savings
enters the utility function (Howe, 1975). This result provides a justification for the inclusion of savings in
the regional utility function.

Demand

Private expenditures are governed by a Constant Difference of Elasticity (CDE) function which was first
proposed by Hanoch (1975). The CDE function has the desirable property that the resulting preferences
are not homothetic and is more parsimonious in its parameter requirements than functional flexible forms.
It can also be shown that the CES and the Cobb-Douglas are special cases of the CDE function.
Government expenditures are governed by a Cobb-Douglas preference function. Finally, there is
inter-industry demand whose technical specifications are described by the usual input-output matrix.

Production

Production is assumed to be described by a multi-level production function (see Figure 1). The upper
nest is a Leontief-type production function involving value added and intermediate inputs. The technical
coefficients of this top-level nest are generated from the Social Accounting Matrix (SAM) constructed for
each region. Value added is produced through a Constant Elasticity of Substitution (CES) function of the
five primary factors of production. Each intermediate input is in turn produced using domestic and

model. The data employed in the study is version 4 which uses 1995 data as the benchmark. The data is
described in greater detail in McDougall, R. et al (1999).
The 9 regions used in our simulation are ASEAN, the US, EU, Japan, China, Korea, Rest of Asia, the
Common Economic Relations (CER) and the Rest of the World. The GTAP database does not include all
ASEAN countries, and hence, ASEAN in this paper covers only Indonesia, Malaysia, Philippines,
Singapore, Thailand and Viet Nam. In this paper, "China" includes both the People's Republic of China
(PRC) and Hong Kong. This reflects not only the political reality that Hong Kong is now part of the PRC
but also the level of economic integration between Hong Kong and the PRC. It is important to highlight
that the inclusion of Hong Kong with the PRC implies that the renminbi devaluation is also accompanied
by a devaluation of the Hong Kong dollar by the same amount. Now the likelihood of Hong Kong
abandoning its currency board increases with the size of the renminbi devaluation, in which case,
lumping Hong Kong and the PRC together may make sense only for large devaluation scenarios. For
small devaluations of the renminbi, therefore, this paper may tend to overstate the likely impacts.
Other regions include the US, Japan and the EU which represent the biggest export markets of ASEAN
and China. Korea is given particular attention because it is an important crisis country. The other three
regions, which complete the aggregation employed in this paper are the Common Economic Relations
comprised of Australia and New Zealand, Rest of Asia and the Rest of the World.
The 10 sectors are food, vegetable oils and fats, other agricultural products, extractive industries, textiles,
chemicals, electronics and machinery, motor vehicles, other manufactures and services. The particular
aggregation employed highlights important sectors of interest to the ASEAN countries. The mapping from
the 45 country and 50 sector grouping of GTAP to our 9x10 model appears in Annex 1.

Simulating a Devaluation

Applied general equilibrium models are "real" models of the economy in which monetary and financial
variables do not enter. Hence macroeconomic variables are normally not integrated into AGE models
and if they are, ad hoc methods are typically used to introduce macroeconomic shocks or variables into
AGE models.
There are several ways in which macroeconomic shocks can be introduced in applied general equilibrium
models. One would be to impose the shocks exogenously by changing real prices or investment flows.

TABLE 1
Nominal Devaluation and Rates of Inflation in ASEAN and Korea, 1997-99
REGION
REGIONREGION
REGION
Nominal
Nominal Nominal
Nominal
Devaluation
DevaluationDevaluation
Devaluation
CPI
CPI CPI
CPI
Inflation
InflationInflation
Inflation
Real
Real Real
Real
Devaluation
DevaluationDevaluation
Devaluation
ASEAN
67.3%
80%
14.3%
Indonesia Malaysia Philippines
Singapore Thailand Vietnam
67.4%

difficult to provide estimates of how much the banking crisis in Asia has affected the long-run growth
potential of the region, it is important to take these supply shocks into account because they affect the
short to medium term response of the producers in the crisis-affected countries. The output shock
assumption has also been used in other AGE simulation of the Asian crisis. In this paper, we have made
the productivity shocks equal to the actual GDP contraction experienced in ASEAN and Korea in 1998.
This was equal to -5.5% for Korea while the GDP-weighted average for ASEAN was -4.3% (see Table 2).
The output shock has the effect of dampening the export response to the initial real devaluation. This is
consistent with one of the important stylised features of the Asian crisis, which saw exports in US dollar
terms languish, despite the sharp fall in regional currencies.

TABLE 2
Output Shock in ASEAN and Korea
REGION
REGIONREGION
REGION GDP GROWTH
GDP GROWTHGDP GROWTH
GDP GROWTH
ASEAN
Indonesia
-4.3%
-
13 7%
Malaysia
Philippines
Singapore
Thailand
Vietnam
-6.8%
-0.5%
1.5%

EU 8,209,777.0 8,250,170.0 0.49%
China 813,366.7 815,950.1 0.32%
Korea 451,163.3 378,228.3 -16.17%
Rest of
Asia
710,279.0 713,595.5 0.47%
CER 405,301.8 404,579.6 -0.18%
ROW 4,892,905.0 4,904,165.0 0.23%
TOTAL
TOTALTOTAL
TOTAL 28,314,324.2
28,314,324.228,314,324.2
28,314,324.2 28,319,748.5
28,319,748.528,319,748.5
28,319,748.5 0
00
0.02%
.02%.02%
.02%
Table 4 shows the world market share of all regions in the baseline scenario (Asian Crisis). ASEAN and
China are still relatively small players in the world market with ASEAN representing 6.9% of world exports
and China making up 5.0% of world exports. However, they are significant market participants in some
important products. ASEAN is a major player in vegetable oils (20.9% of world exports) and other
agricultural products (15.1% of world exports) while China has a huge share of textiles and apparel
(17.9%) and a significant share of other manufactures (7.8%).
Figure 2 shows the sectoral composition of ASEAN exports. More than a third of ASEAN exports are
exports of electrical appliances and machinery; other major export sectors are other manufactures and
services.
CER
CERCER
CER ROW
ROWROW
ROW
Food 7.20 12.80 0.50 43.30 2.30 0.70 3.00 4.80 25.40
Vegetable Oil 20.90 22.10 0.10 21.70 2.30 0.00 1.50 0.60 30.70
Other
Agricultural
Products

15.10 10.50 0.40 25.80 3.10 0.40 3.20 6.30 35.30
Extractive 8.00 3.30 0.30 12.00 1.60 0.10 1.90 4.00 68.80
Textiles and
Apparel

7.40 5.00 2.90 33.10 17.90 3.90 11.40 0.40 17.90
Chemicals 4.80 12.00 6.10 49.40 2.50 1.80 2.70 0.90 19.80
Motor Vehicles 1.40 14.10 15.60 49.60 0.60 1.50 1.00 0.30 15.90
Electrical and
Machinery

9.50 15.50 16.50 37.30 4.10 2.70 4.30 0.40 9.80
Other
Manufactures

6.20 8.30 5.80 43.40 7.80 1.70 3.40 1.20 22.10
Services 6.60 17.50 5.40 40.80 5.90 2.10 1.60 1.70 18.30
Total
TotalTotal

SECTORS USA
USAUSA
USA EU
EUEU
EU JAPAN
JAPANJAPAN
JAPAN

ASEAN China ASEAN China ASEAN China
Food 12.6% 2.4% 1.9% 0.5% 15.6% 8.2%
Vegetable Oil 33.7% 0.3% 12.5% 1.2% 13.4% 5.6%
Other
Agricultural
Products
26.6% 1.9% 7.5% 1.5% 26.4% 8.1%
Extractive
Industries
1.4% 1.0% 1.1% 0.6% 22.0% 3.7%
Textiles & Apparel 12.9% 20.6% 4.2% 8.7% 9.4% 55.9%
Chemicals 4.0% 4.6% 0.9% 1.3% 10.3% 6.0%
Motor Vehicles 1.2% 0.8% 0.4% 0.1% 1.1% 1.3%
Electrical and
Machinery
15.2% 5.8% 4.1% 3.0% 21.0% 10.1%
Other
Manufactures
7.1% 15.0% 2.4% 4.1% 14.0% 17.2%
Services 7.0% 9.6% 4.2% 3.2% 16.8% 7.4%
TOTAL
TOTALTOTAL

appliances and machinery and other manufactures.
e. The biggest losers from the renminbi devaluation are the EU, Japan, the CER and the US. This
follows from the rapid expansion of Chinese exports in those sectors in which the EU, Japan
and the US are major exporters.
f. ASEAN experiences only a moderate impact from a renminbi devaluation. Exports contract by
1.02% with a 10% devaluation and by 3.2% with a 25% devaluation. However, individual
ASEAN countries who are major exporters of textiles and apparel and other manufactures may
suffer disproportionately more.
g. Global trade still expands as a result of a renminbi devaluation despite the fall in exports from all
other regions.
Table 6 shows the changes in export values in the aftermath of a renminbi devaluation. China’s exports
leap by US $ 96.6 billion (a 33.9% increase) in the wake of a 10% devaluation while ASEAN’s total
exports decline by nearly US $ 4.0 billion (a 1.02% fall). A 25% devaluation of the renminbi more than
doubles Chinese exports by US $ 341.17 billion (a 119.7% increase) and reduces ASEAN exports by US
$ 12.5 billion (or a 3.2% decline).
TABLE 6
Change in Regional Exports from Renminbi Devaluation
(Simulation Result)
REGION
REGIONREGION
REGION TEN PERCENT DEVALUATION
TEN PERCENT DEVALUATIONTEN PERCENT DEVALUATION
TEN PERCENT DEVALUATION
TWENTY
TWENTYTWENTY
TWENTY-

-FIVE PERCENT
FIVE PERCENT FIVE PERCENT
FIVE PERCENT

-3.50%
-79.0
billion
KOREA -0.85%
-0.93
billion
-2.46%
-2.7
billion
REST OF ASIA -0.88%
-1.7
billion
-2.73%
-5.1
billion
CER -1.42%
-1.1
billion
-4.80%
-3.7
billion
REST OF WORLD -1.11%
-12.8
billion
-3.83%
-44.4
billion
TOTAL
TOTALTOTAL
TOTAL 0.53%

exports after the devaluation. From Table 7, we see that motor vehicle exports already doubles (albeit
from small levels) with a 10% devaluation. There is also a strong response in the electrical appliances
and machinery sector, textiles and other manufactures. Note that both motor vehicles and electrical
appliances and machinery are sectors where Japan and the US have a large share of world exports. The
EU has a substantial share of world exports in textiles and apparel and other manufactured products
which explains why in absolute terms, the renminbi devaluation also has a large adverse effect on it.

TABLE 7
Sectoral Changes in Chinese Exports
(Simulation Result)
SECTOR
SECTORSECTOR
SECTOR 10% DEVALUATION
10% DEVALUATION10% DEVALUATION
10% DEVALUATION 25% DEVALUATION
25% DEVALUATION25% DEVALUATION
25% DEVALUATION
Food 31.93% 110.29%
Vegetable Oil 26.14% 86.88%
Other Agricultural
Products
33.16% 113.82%
Extractive Industries 31.27% 114.25%
Textiles & Apparel 34.71% 114.64%
Chemicals 20.91% 68.09%
Motor Vehicles 101.06% 566.31%
Electrical Appliances &
Machinery
38.15% 138.84%
Other Manufactures 37.45% 131.02%


TABLE 8
Sectoral Changes in ASEAN Exports
(Simulation Result)
SECTOR
SECTORSECTOR
SECTOR 10% DEVALUATION
10% DEVALUATION10% DEVALUATION
10% DEVALUATION 25% DEVALUATIO
25% DEVALUATIO25% DEVALUATIO
25% DEVALUATION
NN
N
Food -2.38% -6.31%
Vegetable Oil -1.50% -4.03%
Other Agricultural
Products
-1.94% -5.94%
Extractive Industries -2.06% -7.18%
Textiles & Apparel -5.53% -17.65%
Chemicals 0.16% 0.90%
Motor Vehicles 1.79% 5.06%
Electrical App. &
Machinery
0.25% 0.74%
Other Manufactures -2.26% -7.61%
Services -0.62% -1.61%
TOTAL
TOTALTOTAL
TOTAL -

Rest
Rest Rest
Rest
of
of of
of
Asia
AsiaAsia
Asia
CER
CERCER
CER ROW
ROWROW
ROW
Food 7.00 12.60 0.50 43.20 3.10 0.70 3.00 4.80 25.20
Vegetable Oil 20.80 21.90 0.10 21.60 2.90 0.00 1.50 0.60 30.60
Other
Agricultural
Products

14.90 10.10 0.40 25.60 4.20 0.30 3.20 6.20 35.10
Extractive 7.80 3.30 0.30 12.00 2.10 0.10 1.90 4.00 68.50
Textiles and
Apparel

6.90 4.50 2.60 30.80 23.80 3.70 10.60 0.40 16.70
Chemicals 4.80 11.90 6.00 49.10 3.00 1.80 2.70 0.90 19.70
Motor Vehicles 1.40 14.00 15.10 49.50 1.30 1.50 1.00 0.30 16.00
Electrical and
Machinery

TABLE 10
STRUCTURE OF WORLD EXPORTS AFTER 25% DEVALUATION
(Simulation Result)
SECTO
SECTOSECTO
SECTOR
RR
R ASEAN
ASEANASEAN
ASEAN USA
USAUSA
USA Japan
JapanJapan
Japan EU
EUEU
EU China
ChinaChina
China Korea
KoreaKorea
Korea
Rest
Rest Rest
Rest
of
of of
of
Asia
AsiaAsia
Asia
CER

6.606.60
6.60 11.90
11.9011.90
11.90 7.50
7.507.50
7.50 37.70
37.7037.70
37.70 10.80
10.8010.80
10.80 1.90
1.901.90
1.90 3.20
3.203.20
3.20 1.30
1.301.30
1.30 19.30
19.3019.30
19.30
Since her exports of motor vehicles and electrical appliances and machinery start from relatively low
levels, the renminbi devaluation only produces small changes in her market share of world exports in
these sectors. Nevertheless, the gain in market share comes primarily at the expense of Japan and the
EU.
We also examine in which markets Chinese exports gain the most (Table 11) and in which markets
ASEAN loses its hold (see Table 12). Chinese exports gain market share in all regions, with the biggest
gains being made in the Japanese and US markets. There is also strong penetration of the Asian
economies - ASEAN, Korea and rest of Asia - particularly for larger rates of devaluation. This is
consistent with the greater trade and economic links among the Asia-Pacific countries. As is expected,
ASEAN exports lose market share in Japan and the US and just manages to maintain its hold on the EU
market. Intra-ASEAN trade also declines as a result of the renminbi devaluation, with the share of
intra-ASEAN imports falling from 19.2% to 18.5% for a 25% renminbi devaluation. We also note that prior


TABLE 12
MARKET SHARE OF ASEAN
REGION
REGIONREGION
REGION BASELINE
BASELINEBASELINE
BASELINE 10% DEVALUATION
10% DEVALUATION10% DEVALUATION
10% DEVALUATION 25% DEVALUATION
25% DEVALUATION25% DEVALUATION
25% DEVALUATION
ASEAN 19.20% 19.10% 18.50%
US 8.80% 8.70% 8.20%
JAPAN 16.30% 15.70% 14.40%
EU 2.90% 2.90% 2.80%
CER 10.80% 10.60% 10.20%
KOREA 8.60% 8.50% 8.10%
REST OF ASIA 12.90% 12.80% 12.30%
ROW 3.80% 3.80% 3.70%
CHINA 11.90% 11.50% 10.70%

We raise two important risks here. The simulations suggest that Japan has the most to worry about from
a renminbi devaluation. There may be strong pressure on Japan to allow its currency to devalue as a
consequence of a renminbi devaluation, which may then lead to further trade pressures on the ASEAN
countries. The second issue has to do with the possible rise of US protectionism if the renminbi
devaluation leads to a surge of Chinese imports and a deterioration in the US trade balance. We examine
this last issue in greater detail below.

Effect on US Trade Balance

the devaluation is sufficiently large, and the spillover effects of a renminbi devaluation on other traders
and how they respond to it may be an additional worries

Summary and Conclusions
The paper uses a 9 region 10 sector applied general equilibrium model to simulate the effect of a
renminbi devaluation on ASEAN's competitive position in major export markets - the US, Japan and the
EU. The simulation is conducted in two phases. The first phase involves replicating the Asian crisis. This
is done by reducing factor prices in ASEAN and Korea by an amount equal to the real devaluation faced
by those two regions and applying a negative shock to output equal to the average contraction
experienced by the two regions in 1998. The second phase reduces factor prices in China between 10%
to 25% to simulate a range of possible renminbi devaluation scenarios. The results suggest that while a
renminbi devaluation only has a small effect on total ASEAN exports, there is substantial sectoral impact
on exports of textiles and apparel as well as other manufactures. This suggests that individual ASEAN
countries may experience a significant negative impact since textiles and other manufactures are a
bigger proportion of the trade of countries like Indonesia, the Philippines and Thailand. ASEAN's import
share also falls significantly in its key markets - Japan, China and the US. A renminbi devaluation is also
expected to erode the share of intra-ASEAN trade. Furthermore, there are other associated risks of a
renminbi devaluation which must be taken into account. It turns out that a renminbi devaluation has large
spillover effects on Japan, which could precipitate competitive devaluation pressures in the rest of the
region. Finally, it is also important to factor in the possible rise of protectionist sentiment in the US, which
has experienced strained relations with China, and which would suffer a large imbalance in the trade
account in the face of a large renminbi devaluation.
There are a number of possible extensions of the study that could be undertaken to strengthen the
conclusions that have been reached. The most obvious extension is to more adequately incorporate the
Asian Crisis elements in an AGE model. While there are limits to how well AGE models could capture the
Asian crisis, it is possible to look at alternative ways of introducing the shock to the GTAP framework, e.g.,
work through commodity prices rather than factor prices, set the trade balance or investment
exogenously, etc. Second, we have combined the PRC and Hong Kong together as one region, which
implicitly means that any devaluation of the renminbi is accompanied by an abandonment of the currency
board. Surely, this is not likely for small movements in the renminbi and a decoupling of the two for small

2. Vegetable Oils and Fats Oil seeds; Vegetable oils and fats
3. Other Agricultural Products
Plant-based fibres; Crops nec; Bovine
cattle, sheep and goats, horses; Animal
products nec; Raw milk; wool, silk-worm
cocoons;
4. Extractive Forestry; Coal; Oil; Gas; Minerals nec;
5. Textiles and Apparel Textiles; wearing apparel
6. Chemicals
Petroleum, coal products; Chemical,
rubber, plastic products
7. Motor Vehicles
Motor vehicles and parts; Transport
equipment nec
8. Electronics and Machinery
Electronic equipment; Machinery and
equipment nec
9. Other Manufactures
Beverages and tobacco products; Leather
products; Wood products; Paper
products, publishing; Ferrous metals;
Metals nec; metal products;
Manufactures nec
10. Services
Electricity; Gas manufacture,
distribution; Water; Construction;
Trade, transport; Financial, business,
recreational services; Public
administration and defence, education,
health; Dwellings

Canada, Central European Associates,
EFTA, Finland, Former Soviet Union,
Turkey, Rest of Middle East, Rest of
World

Source: /> 09/1999